Chesapeake sells assets to reduce debt and increase liquidity

Icahn influence.

Confirming media speculation earlier last week, Chesapeake announced plans to sell its midstream assets in three transactions for cash proceeds of more than $4.0 billion. As a result, Chesapeake plans to reduce capital spending by $3.0 billion over the next three years.

In the first transaction, Chesapeake agreed to sell its LP and GP interests in  Chesapeake Midstream (CHKM) to Global Infrastructure Partners (GIP) for $2.0 billion. CHKM generated $120 million in EBITDA in Q1/12, suggesting Chesapeake monetized its 45.2% limited partner interest and 1.0% general partner interest for 9.0x Q1/12 annualized EBITDA. Further, Chesapeake entered into a letter agreement with CHKM and another letter with GIP to sell additional midstream assets for $2.0 billion.

While Canaccord Genuity see these  midstream transactions as positive for liquidity, the most pressing current issue, they appear slightly negative to his valuation. Assuming Chesapeake successfully completes the above transactions, estimated year-end 2012 net debt should decline from ~$18.5 billion to $14.7 billion. To comply with its 4x net debt/TTM EBITDA covenant, Canaccord believes Chesapeake needs to monetize $2.5 billion in additional assets.

To achieve its year-end target of $9.5 billion, Chesapeake needs to monetize~$5.5 billion inadditional assets. Canaccord  believe this is achievable as additional asset sales should net $6.5-10 billion.

As a result of these changes, we are increasing our price target $2 to $28 per share due to lower midstream capital spending.

Chesapeake Energy (CHK : NYSE : US$18.35), Net Change: 0.50, % Change: 2.80%, Volume: 30,782,711

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